Freddie Mac announced its new seismic risk policy for multifamily seller/servicers to follow on April 24, 2013.   Mark Field, Underwriter for the Targeted Affordable Group, summarized the new procedures on April 24, 2013.  The policy will be officially released in the April 30, 2013 Guide update and will go into effect for all reports ordered on or after June 1, 2013.

Overview of Forthcoming Freddie Mac Seismic Policy

In general, the changes are not dramatic and are generally consistent with the requirements of CMBS lenders, life company lenders, and Fannie Mae.    Freddie Mac’s policies will recognize ASTM E2026-07 “Standard Guide for Seismic Risk Assessment of Buildings” and ASTM E2557, the most recent seismic risk assessment standards.  The changes will bring the Freddie Mac seismic policy in closer alignment with the recommended practice in ASTM E2557.

Mr. Field announced that Freddie Mac will use the Scenario Expected Loss (SEL) as their primary expression of seismic risk, which is consistent with the recommendations of ASTM E2557.   The SEL will be measured against the longtime industry standard of 20%.   This is good for borrowers and lenders as the SEL is lower than the SUL.

By the way, instead of using the term Probable Maximum Loss (PML), Freddie will be shifting towards the term Seismic Risk Assessment (SRA)—these words are generally interchangeable.

Freddie Mac will continue to use its less expensive desktop product that could be considered a Level Zero on many of the assets in seismic zones 3 and 4.  However, the new policy will require the borrower to go straight to a Level 1 Seismic Risk Assessment if the asset exhibits certain high risk characteristics.  

Also, Freddie Mac is requiring that the firm doing the work is qualified.   The firm must have a licensed engineer in a seismic state.  In my view this is already a requirement of the states.   You should ask your due diligence firm if they employ a registered engineer with the appropriate experience in earthquake engineering and seismic risk.

Whether a Level Zero or Level 1 is required initially will depend on how the Freddie Mac Forms 1117 and level 1105 are filled out.   In the good state of the world, the asset will be evaluated the same way as it has always been.   If the asset has a risk characteristic of concern then a Level 1 Seismic Risk Assessment would be required.

Upcoming Webinar on Seismic Risk Assessments

If you are really interested in seismic risk assessments, our Technical Director of Structural Engineering, Josh Marrow, is offering a seismic webinar that will include a summary Freddie Mac’s new policy on Tuesday, May 7, 2013.     The webinar will discuss the science of seismic risk assessment as well as scope requirements of ASTM, Fannie Mae, Freddie Mac, and HUD.   Click on this link to register:  Essentials of Seismic Risk Assessments Webinar.